Indonesian Law to Upset Coal Price Equation - Quoted in the Economic Times

Indian power developers have sought government intervention as a new law in Indonesia,the largest coal supplier,makes imports economically unviable.Indonesia has said it would not allow exporting companies to sell coal at prices below notified rates after September 23.Australia issued a draft mining law 10 days ago to impose levy on coal and iron ore projects from next year.

Association of Power Producers,a group of 13 private companies,has asked power ministry to set up an expert committee to find appropriate solution to tackle rise in imported rates.The body representing companies like Tata Power,Reliance Power,Adani Power,Lanco Infratech and Essar Power,has also demanded that change in fuel cost be allowed to be passed on to the consumers as tariff hike or reduction.

A senior power ministry official said the government was considering the demand.Association director general Ashok Khurana said the current contractual framework does not protect power companies from coal price changes triggered by any change in law in the exporting country.Power projects worth 43,000 mw,awarded under competitive bidding,are under construction.Khurana said about 30% of this capacity or 13,000 mw is based on imported coal.

Power companies had offered bids based on their agreements with fuel suppliers predominantly in Indonesia.If the companies are not able to honour their commitments,it would be a concern for bankers and consumers, he said.Besides,countrys dependence on imported coal is expected to increase as Coal India has not been able to ramp up production.

Coal mining and power sectors are grappling with environment-related issues.Indonesia and Australia contribute about 55% of Indias coal imports.The power producers body said power producers will not be able to honour long-term commitments as the new mining law in Indonesia provides for annual alignment of coal prices with international rates.The change in coal pricing method is likely to make coal costlier by.1,500 a tonne for Indian power utilities.

Until now,there was no regulation by Indonesian government on coal pricing.Australia - that contributes about 5% of imports by Indian power sector plans to introduce carbon tax and levy on super profits on mining companies.Khurana said after implementation of these laws,Australian coal prices are expected to go up by $20-25 per tonne.

Deloitte director consulting (mining) Dipesh Dipu said coal prices might increase as miners in Australia would like to pass on the increase in levies to consumers.

Indonesia new coal policy worries India power firms - Quoted in the Financial Chronicle

Tata Power, Adani group, Lanco Infratech and Reliance Power, among other Indian coal importers, are waiting to assess the impact of the Indonesian government attempts to benchmark its coal prices to international indices. The new system has the potential to increase the cost of thermal power generated using imported coal in India.


The new method that will come into effect from September attempts to link the royalties paid to the Indonesian government to an index of coal prices for Australian and South African coal in addition to others. But Indian firms said Indonesian coal is of lower calorific value and, hence, priced cheaper compared with Australian and South African coal.

Deepak Amitabh, director (corporate finance) of PTC, said there are lots of issues, which still need to be sorted before the coal prices are determined. “We are still not clear how the government will work out the price differentials between Indonesian coal and that produced by Australia or South Africa, for example. Also the spot prices are always costly compared with the long-term sales contracts. We need to find out if the long term contracts for Indonesian coal would be at discount to international market prices or not.”

In September 2010 the Indonesian government issued new regulations to determine the benchmark price for the sale of coal and minerals. The regulation proposes to peg the price for both domestic sales and export of coal to a ‘benchmark price’ for all the mining licensees. Dipesh Dipu, director, consulting (mining) at Deloitte in India said the new regulation will force companies to transact at market prices, which may be seen as raising the cost of delivered coal in India.

“When companies invest in Indonesia, they tend to have the intent to sell coal at cost, so that Indonesian business unit remained at no or negligible profits. Taking a holistic view, however, the cash flows in an integrated Indonesian coal mining and Indian power generation unit after this regulation will continue to be similar, except that income taxes will be paid in Indonesia, and the cash flows will need to be brought on the books on Indian power project after paying taxes in Indonesia through appropriate and innovative business structuring,” said Dipu.

Banmali Agarwala, executive director and head of business development at Tata Power said, “The increased pricing will definitely affect the cost of generation and we are trying to work out a strategy to handle the additional hike.”

Adani group that sources coal from its mines in Indonesia is also expected to be affected by this regulation, as Adani Enterprises has direct stake in Bunyu mines in Indonesia. Adani Power has contracted to procure 4.6 mtpa coal from Adani Enterprises at $36 per tonne. However, the total import requirement for present operational capacities is around 6 mtpa.

Vijaykumar Bupathy, senior analyst with Spark Capital Advisors, said in report that “Assuming a $50 per tonne increase in the free on board (FoB) price of coal, there would be Rs 1,040 crore incremental fuel cost to the group to the extent of the committed 4.6 mtpa of supply alone.” However, when Financial Chronicle contacted Adani Enterprises, the company said there will be no direct impact on the company, since its total cost of mining and transporting Indonesian coal to Mundra is $25 per tonne. The coal is sold to Adani Power at $36 per tonne. “Any hike in price would only increase the royalty payments by around $1 or $2 per tonne. This may have a marginal impact on the company,” said a senior finance official of Adani Enterprises.

GVK Power to Buy 2 Australian Coal Mines - Quoted in the Mint

In one of the largest overseas coal mine acquisitions, GVK Power and Infrastructure Ltd. is set to purchase two of Hancock Prospecting Pty Ltd.'s thermal coal mines in Australia for around $2.4 billion.


An initial agreement has been signed by Sanjay Reddy, vice chairman of GVK, with Gina Rinehart, chairman of Hancock, earlier this month, according to sources close to the deal.

The acquisition is critical to GVK Group's plans to expand its power-generation capacity of 901 megawatts to 10,000 megawatts by 2013. Lack of secure fuel supply is forcing some developers to operate below optimal capacity.

The two coal mines, Tad's Corner and Kevin's Corner, are owned by Hancock Coal and Hancock Galilee, both subsidiaries of Hancock Prospecting, and are located in Queensland. The two mines have a capacity of 30 million tons per annum each, and Tad's Corner and Kevin's Corner have recoverable resource bases of 3.6 billion tons and 4.27 billion tons, respectively.

According to documents reviewed by Mint, the two mines have shared mine infrastructure, rail and port facilities.

"The individuals have signed, but the companies haven't," said a senior GVK executive, who didn't want to be named. It's expected to take a month to complete the paperwork, and a formal announcement is expected shortly after that.

GVK Group Chairman G.V. Krishna Reddy declined comment citing a "confidentiality clause".

Hancock companies also didn't respond to questions seeking comment.

While an initial sum of $1.25 billion will be paid at the time of completion of formalities, the balance will be paid in two equal installments. GVK may also have to spend an additional $9 billion to develop the mines, extract coal and set up transport infrastructure. The deadline for exclusive negotiations, which was on for some time now, was extended from May to June.

The acquisition is a trategic fit for Indian power generation companies as this promises a longer term supply security of good quality coal, and coal mining operations can be scaled up with time, said Dipesh Dipu, director (consulting, energy and resources, mining) at DeloitteTouche Tohmatsu India Pvt. Ltd.

"The stable regulatory framework and developed financial markets for resources in Australia also make it possible to operationalize mines on schedule," he said.

Some of the largest coal mine acquisitions made by Indian firms include Lanco Infratech's purchase of Griffin Coal Mining Co.'s coal mines in Western Australia for $750 million Australian dollars and Adani Group's acquisition of Australian firm Linc Energy Ltd.'s Galilee coal tenement for $2.7 billion.

Australia is the largest exporter of metallurgical coal and the second largest exporter of thermal coal. According to the BP Statistical Review of World Energy , global coal consumption grew 7.6% to 250 million tons of oil equivalent, with China and India increasing their consumption by 10.1% (54.1 million tons) and 0.8% (27 million tons of oil equivalent), respectively.